Did FDR's policies help us get out of the Great Depression?

[mash107]

Yes, quite the "progressive," that Hoover. I was reading a piece a few weeks ago that estimated that Hoover's "progressive" response was worth $22 billion in today's dollars. Yeah, that's quite the stimulus!

Deflation in the 1930s occurred because asset prices went too high then collapsed. Asset prices went too high because there was too much liquidity and debt in the financial system - sounds familiar, doesn't it? Then, the Fed exacerbated the deflation by keeping interest rates too high and removed banking reserves from the financial system. This is what caused The Depression.

Do you know who made this conclusion?

Milton Friedman.

Deflation wasn't because of FDR's progressive policies. That's a bizarre conclusion. Say what you want about government spending but it certainly is not deflationary when there is an output gap.

And again, as any macro 101 student today knows, labor cost curves are inelastic. This seems to escape the fringe revisionists who blame the Depression on FDR.

If those asset prices were inflated because of too much liquidity, like you said, then the drop in asset prices is a correction that has to occur. It can not be delayed, nor reduced, nor postponed. Trying to intervene in that correction is very much the cause of the problem that exacerbated the recession of 1929 into a Depression. And that's exactly what Hoover tried to do. He had destroyed crops and animals in attempt to prop up those corrected asset prices:

According to Murray Rothbard's excellent book on the Great Depression (book):

President Hoover began to pursue the inexorable logic of government intervention to the next step: recommending that productive land be withdrawn from cultivation, that crops be plowed under, and that immature farm animals be slaughtered—all to reduce the very surpluses that government’s prior intervention had brought into being.

This intervention in the market, along with attempts to prop up wages, were precisely what exacerbated the recession into a Depression. Hoover was the one that started all this interventionism, and FDR merely followed suit with dramatically more of it. So yes, it's probably unfair to blame FDR for the Depression entirely; Hoover gets a good bit of the blame, too. But the lesson that should be learned is that trying to prop up prices, rather they be crops, assets, stocks, or homes (like we're currently doing) is very harmful. And it's impossible, and in fact counterproductive, for the government to try to create jobs and prosperity.

Lew Rockwell's excellent article: Recession or Depression? - Llewellyn H. Rockwell, Jr. - Mises Institute
Another excellent article from Rothbard on the Depression: Hoover's Attack on Laissez-Faire - Murray N. Rothbard - Mises Institute

 

[Toro]

ROFLMNAO... Oh GOD that's precious... Amongst other things, Hoover went along with a massive contraction of the money supply by the Federal reserve from '29 -32 which caused the bank failures, which only exascerbated the money supply shrinkage and public panic; Hoover also signed Smoot- Hawley raising import tax in 25,000 imported product categories to 60%, causing a retaliation by most of the free world... causing our exports to tank... AGAIN INFLUENCING DEFLATION; he further promoted preventing banks from 'branching' which prevented diversification of bank portfolios... ALL OF WHICH lead to massive deflation... He then signed the 'Revenue Act of '32' which was the largest peace-time tax increase in US history at the time... raising the top marginal rate from 25 - 63%...

You apparently have a reading comprehension problem, ExtremusInfinitus, because I mentioned that the Fed's tight monetary policy and withdrawal of reserves from the banking system as the primary cause of why a sharp recession became The Great Depression, which was exacerbated by a tax increase and the Smoot-Hawley tariffs.

When FDR was elected in 32 he further increased regulation cost and taxation on the market and raised the top marginal rate to 80%. At the same time, in this frenzy of Keynsian progressivity... State and Local governments began to implement their OWN incentive killing TAXATION on personal and Corporate income... adding FURTHER DEFLATIONARY influences... add to that the National Industrial Recovery Act of 1933 which amounted to a litanny of price freezes in an effort to slow deflation WHICH HE AND HOOVER CAUSED... ONLY ADDING TO DEFLATIONARY PRESSURE by driving the cost of business beyond a sustainable level, causing GREATER LAYOFFS, DECREASING THE SIZE OF THE VIABLE MARKET... by substantially reducing the number of people with sufficient discretionary money to BUY MANY PRODUCTS...

Inflation 1929-1939

St. Louis Fed: Series: CPIAUCNS, Consumer Price Index for All Urban Consumers: All Items

Oooh, so sorry to blow your cute little ideological thesis to bits, but deflation ended in May 1933, a few months after FDR was elected.

Remember, empiricism > ideology

Look dumbass... NONE OF THIS IS COMPLICATED. Nature works on SUPPLY AND DEMAND... when DEMAND IS HIGH AND SUPPLY IS DOWN... PRICE GOES UP... when DEMAND IS DOWN PRICE GOES DOWN... And FYI: Price going down equals DEFLATION.

Hey, guess what - The Great Depression isn't complicated! Of course, to linear thinking ideologues, complicated matters never are. Just get a cocktail napkin and check those ideological boxes, and voila!, you have all your answers!

 

[Toro]

If those asset prices were inflated because of too much liquidity, like you said, then the drop in asset prices is a correction that has to occur. It can not be delayed, nor reduced, nor postponed.

Actually, corrections can be delayed, reduced and postponed. They cannot, IMO, be avoided. The mess in the financial system today can be traced to our avoidance of a severe recession caused by the tech bubble, which was caused both by lax monetary policy but also by significant cost-reducing new technologies. In fact, the tech bubble looks like a classic asset bubble.

[ame=http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146/ref=sr_1_1?ie=UTF8&s=books&qid=1230258674&sr=1-1]Manias, Panics and Crashes[/ame], Charles Kindelberger.

The policies of the Greenspan Fed, and to a lesser extent, the Bush White House, not only delayed the inevitable, they made today's housing bubble collapse worse.

Trying to intervene in that correction is very much the cause of the problem that exacerbated the recession of 1929 into a Depression. And that's exactly what Hoover tried to do. He had destroyed crops and animals in attempt to prop up those corrected asset prices:

According to Murray Rothbard's excellent book on the Great Depression (book):


This intervention in the market, along with attempts to prop up wages, were precisely what exacerbated the recession into a Depression. Hoover was the one that started all this interventionism, and FDR merely followed suit with dramatically more of it. So yes, it's probably unfair to blame FDR for the Depression entirely; Hoover gets a good bit of the blame, too. But the lesson that should be learned is that trying to prop up prices, rather they be crops, assets, stocks, or homes (like we're currently doing) is very harmful. And it's impossible, and in fact counterproductive, for the government to try to create jobs and prosperity.

Lew Rockwell's excellent article: Recession or Depression? - Llewellyn H. Rockwell, Jr. - Mises Institute
Another excellent article from Rothbard on the Depression: Hoover's Attack on Laissez-Faire - Murray N. Rothbard - Mises Institute

The reason why the 1929 recession became the Depression was because the Fed tightened too much and withdrew liquidity from the system.

[ame=http://www.amazon.com/Monetary-History-United-States-1867-1960/dp/0691003548/ref=sr_1_1?ie=UTF8&s=books&qid=1230258267&sr=1-1]Monetary History of the United States[/ame], Milton Friedman.

[ame=http://www.amazon.com/Essays-Great-Depression-Ben-Bernanke/dp/0691118205/ref=sr_1_1?ie=UTF8&s=books&qid=1230258327&sr=1-1]Essays on the Great Depression[/ame], Ben Bernanke.

 

[BaronVonBigmeat]

This is why blaming FDR's policies on the stickiness of labor does not hold. Keynes observed this before FDR was elected, even though he wrote about it in the General Theory.

Sorry, I'm probably not being very clear. I don't blame FDR for labor prices being sticky. They adjusted slowly then and they adjust slowly now. People get accustomed to nice things. People don't like to swallow their pride. Employers prefer to have a smaller group of good employees rather than a large group of disgruntled and insulted employees. And so forth.

No, what I'm blaming FDR for is the price floors. Yeah, wages adjust slowly. Yeah, unions hold out for more money. But for a decade? No.

People hold out for a few months and burn through some savings, then they swallow their pride and turn to whatever lesser paying jobs are available. If unemployment goes on for years and years, we can only assume that the government has made the true market wage rate illegal, via minimum wage laws, or by forcing employers to use union labor--both of which the new deal did.

 

[Ravi]

Oooh, so sorry to blow your cute little ideological thesis to bits, but deflation ended in May 1933, a few months after FDR was elected.

So could you say that FDR's policies actually ended deflation? IIRC, he restored consumer confidence simply by promising a chicken in every pot. Without consumer confidence there is no economy.

There's a lot to be said about a president that can make people believe things are going to get better. Because then they start spending.

 

[Toro]

So could you say that FDR's policies actually ended deflation? IIRC, he restored consumer confidence simply by promising a chicken in every pot. Without consumer confidence there is no economy.

There's a lot to be said about a president that can make people believe things are going to get better. Because then they start spending.

Its hard to say. I think he had some effect. To what level, I do not know. What I am arguing against is that his policies exacerbated the Depression and deflation. That's nonsense. But if someone argued he only had a minor influence, I wouldn't necessarily take issue with that.

 

[BaronVonBigmeat]

Also, Publius--Rothbard never disputed that the money supply contracted due to Fed bungling (or conspiracy if you prefer). In fact his book that you linked to even has a numeric chart to prove the point, if I recall correctly.

So in that sense, the austrians like Rothbard are in agreement with the supply-siders and the Keynesians and of course the monetarists. The money supply did indeed shrink, and that is not something the fed should ever do.

Unless I've understood incorrectly, Friedman argued that the fed should have continued inflating. The austrians argue that the 20's inflation was unsustainable and that sooner or later the fed would have to choose to either A) stop inflating and let bad investments get liquidated, or B) continue inflating at an accelerated rate, ultimately ending in hyperinflation.

 

[Red Dawn]

Deep thought:

Conservatives don’t know what the fuck they’re talking about on economic policy.


The recession began in December 2007 according to the National Bureau of Economic Research.

A cursory review of the posts on this forum and other internet forums show that during the time of this recession, conservatives have been posting threads that the economy was pretty darn good, the fundamentals of the economy were strong, that the bush tax cuts for the rich were supposed to usher in an era of awesome job growth, and the government should deregulate the markets and corporations.

The only proper response to a conservative lecturing you on FDR or economic policy in general is to laugh them out the room.

 

[mash107]

Also, Publius--Rothbard never disputed that the money supply contracted due to Fed bungling (or conspiracy if you prefer). In fact his book that you linked to even has a numeric chart to prove the point, if I recall correctly.

So in that sense, the austrians like Rothbard are in agreement with the supply-siders and the Keynesians and of course the monetarists. The money supply did indeed shrink, and that is not something the fed should ever do.

Unless I've understood incorrectly, Friedman argued that the fed should have continued inflating. The austrians argue that the 20's inflation was unsustainable and that sooner or later the fed would have to choose to either A) stop inflating and let bad investments get liquidated, or B) continue inflating at an accelerated rate, ultimately ending in hyperinflation.

Yes, correct on the Austrian theory. They also believe that the longer that is attempted to delay the correction, the harder it'll inevitably be. I should have made that clear in my last post.

It was also a natural consequence for the money supply to shrink, don't you think? All those bank failures that had leveraged to gain in the stock market must have deleveraged, to attempt to meet their obligations, when the stock market collapsed in 1929. I don't think, per se, it was the monetary policy in 1929 to blame for the recession because it was certainly inevitable, rather, like an austrian, it was the monetary policy in the decade that preceded it was to blame. And, of course, I still believe that the economic policies Hoover/FDR enacted were absolutely devastating to any recovery attempts.

 

[Orange_Juice]

I think you meant to say "gained" instead of "lost"(?). Consumers gain buying power under deflation, they lose buying power under inflation.

.

No, I meant lost. If enough consumers lose their way to earn money then their consumption drops which leads to deflation because demand for goods drops, which leads to more job loses. Its a cycle. It spread from farmers to industrial workers, because if the farmers couldn't afford to buy from a Sears catalouge then the workers making the stuff Sears sells get laied off

 

[Gunny]

No, I meant lost. If enough consumers lose their way to earn money then their consumption drops which leads to deflation because demand for goods drops, which leads to more job loses. Its a cycle. It spread from farmers to industrial workers, because if the farmers couldn't afford to buy from a Sears catalouge then the workers making the stuff Sears sells get laied off

How come it is you can see that, but you can't see that increasing the tx burden of the wealthy decreases their investment capital which means all the people like me that build what they invest in get laid off?

Not really a difficult concept. But apply it across the board instead of as it suits your argument.

 

[garyd]

Labor cost were very eleastic till the New dealers empowered the Unions...

 

[mash107]

I fail to see how deflation is at all bad. As a manufacturer, that would mean cheaper manufacturing equipment. As a consumer, that would mean a higher standard of living. As a seller, that only means I need to increase the efficiency in my manufacturing. But why should I care as a seller? There are now a multitude more number of consumers that can afford my product, and so I'll rake it more profits than ever before. Dell still rakes in $10+B/quarter even though their PCs are much "deflated" compared to my first 286 that cost $2000, 20 years ago. And, ultimately, what is good for the consumer is good for the economy. As seen in the graph below, inflation has been out of control:

With all the bailouts recently, tack another $8.5T to that latest number. It's no wonder why our standard of living has been going down. It's the inverse of that very graph!

It wasn't deflation that did us in during the Depression. It was government trying to fix and raise the prices of crops and wages, without looking at the shrinking money supply. The dollar was going up, and Hoover wanted to keep the pay from adjusting down to reflect market prices. And so he killed animals and plowed crops.

 

[Old Rocks]

How come it is you can see that, but you can't see that increasing the tx burden of the wealthy decreases their investment capital which means all the people like me that build what they invest in get laid off?

Not really a difficult concept. But apply it across the board instead of as it suits your argument.

OK. The wealthy have had a nice tax decrease for the last eight years. And the economy is booming, there are more jobs than workers, right? Gunny, you are argueing that the present reality does not exist. Nice conservative viewpoint, but one can readily starve to death in the reality they create for themselves.

The theory was applied, and the policy has been a total failure. According to that nonsense, we should have had this bust in the '90s, after Clinton raised the tax on the highest incomes. Yet we had the longest sustained economic boom in our history. But now we are in a severe recession, really looking like the start of the Second Great Republican Depression.

 

[Toro]

I fail to see how deflation is at all bad. As a manufacturer, that would mean cheaper manufacturing equipment. As a consumer, that would mean a higher standard of living. As a seller, that only means I need to increase the efficiency in my manufacturing. But why should I care as a seller? There are now a multitude more number of consumers that can afford my product, and so I'll rake it more profits than ever before. Dell still rakes in $10+B/quarter even though their PCs are much "deflated" compared to my first 286 that cost $2000, 20 years ago. And, ultimately, what is good for the consumer is good for the economy. As seen in the graph below, inflation has been out of control:

With all the bailouts recently, tack another $8.5T to that latest number. It's no wonder why our standard of living has been going down. It's the inverse of that very graph!

It wasn't deflation that did us in during the Depression. It was government trying to fix and raise the prices of crops and wages, without looking at the shrinking money supply. The dollar was going up, and Hoover wanted to keep the pay from adjusting down to reflect market prices. And so he killed animals and plowed crops.

Deflation isn't all bad. In theory, some deflation is good. Technological innovation is generally deflationary because it lowers cost curves and input costs for businesses. Given that there is an equilibrium rate of profit, prices increases will free up resources to invest elsewhere. The process of technological innovation, in fact, is the primary driver of wealth creation and higher standards of living.

Now, this can be good and it can be bad. During a disruptive new technological innovation, entrepreneurs are "fooled" by the falling cost curves. Falling cost curves lead to rates of profits above the equilibrium rate of profits in the economy. Entrepreneurs see this excess profit and increase investment to capture the excess profit. This increases supply, which causes deflation. If excess profits go away quickly, then excess supply is not much of a problem. Where it is a problem is when the perceptions of excess profits do not go away quickly, which leads to excess over-building and supply. This is what happened in the teleconomy and the tech bubble and more severely in Japan, which has been in a deflationary environment for nearly 20 years. It may also now be occurring in China.

Another problem with deflation, however, is not necessarily deflation itself. It is deflationary expectations, especially in a world that is not built for deflationary expectations. Today, we live in a world that is not constructed for deflation.

All contracts have a component of price changes built in. If a bank lends you money, it has a real rate of return plus a price change component built into the rate of interest it charges you. The real rate of return on your loan is a function of the real rate of return in the economy as a whole and a risk component. The real rate of return in the economy is the rate of capital formation, which in equilibrium is the real growth rate of the economy. The real growth rate in the economy 2%-3% over time. Let's say 3%. The bank's risk component is a function of the probability that you will default on your loan. Let's say you are a small corporation and your risk premium is 3%. Now let's say that long-term inflation has been 2%. Thus, the interest rate you are going to be charged is 8%. Now, if deflation goes to -5% and you are paying an 8% loan, instead of a 2% embedded rate of inflationary revenue growth, your revenue is falling 5%, a 7% swing. Somewhere, you have to take 7% out of your cost structure.

Now, that sounds relatively benign until you realize that debt relative to GDP is enormous.

A significant deflation on this amount of debt would have enormous ramifications for the economy. You may say "We should never have gotten ourselves into this mess in the first place. We should have taken our pain before this got out of hand" and I would probably agree. But we are where we are now.

Finally, the other problem with deflation is that even though in theory lower prices should induce consumers to spend, they do not always. It can also lead to cash hoarding. Why spend now if you believe that your dollar will be worth tomorrow? The velocity of money drops in the economy. This leads to excess savings and inhibits the clearing out of excess inventory in the economy, which is a major problem in Japan. This is the opposite effect of a high inflation economy, where there is no incentive to save, which distorts capital allocation. Deflation also distorts capital allocation.

 

[Old Rocks]

Labor cost were very eleastic till the New dealers empowered the Unions...

Well, given the present ratio of management earnings to those that do the actual work, I think we need to give the unions far more power.

 

[sparky]

I fail to see how deflation is at all bad.

perspective & context Mash

consider your (or most) retirement portfolio's

we might get the 'tired' part....if we're lucky....

 

[Toro]

Labor cost were very eleastic till the New dealers empowered the Unions...

Keynes observed otherwise.

 

[editec]

Let me cut through the bullshit of this goofy thread.

Let us assume for purposes of argument that FDR's policies to reliquify our economy were, as his detractors say, a complete waste, shall we?

Okay, so according to his detractors, the WAR saved us from a depression, right?

Okay, why?

What happened to make WWII the savior of our society?

What did our government DO to save our economy, please?

 

[midcan5]

There should be no question at all that FDR's policies helped us out of the GD. The growth figures speak for themselves as the timeline below shows. Arguments against tend to be part of the ideological 'conspiracy' that only mere humans left alone can bring economic nirvana through their intelligence, wisdom, and high moral principles. Witness only the recent bubble and crash that demonstrates so clearly this wisdom. [scarcasm off] The war while important to economic success and the defeat of Germany Japan brought back a sense of we can do it and transformed the economy and the mood of the nation. FDR's tacit promotion of unions and a fair shake for all had enormous impact often overlooked by revisionist jackasses.

If interested, this book is worth the money unlike lots of things today.

[ame=http://www.amazon.com/Great-Depression-New-Deal-Introductions/dp/0195326342/ref=sr_1_8?ie=UTF8&qid=1230302046&sr=1-8]Amazon.com: The Great Depression and the New Deal: A Very Short Introduction: A Very Short Introduction (Very Short Introductions): Eric Rauchway: Books[/ame]

Every investor should re-read this every year.

[ame=http://www.amazon.com/Short-History-Financial-Euphoria-Whittle/dp/0140238565/ref=sr_1_2?ie=UTF8&s=books&qid=1230302117&sr=1-2]Amazon.com: A Short History of Financial Euphoria (Whittle): John Kenneth Galbraith: Books[/ame]

depression timeline
Timeline of the Great Depression